Picking up on this database, I went further than Zachariah who showed rates of profit for individual countries and I compiled a weighted measure of the rate of profit for the top seven capitalist economies (G7) and also the so-called BRIC economies (Brazil, India, Russia and China) in order to compute a ‘world rate of profit’.

Most measures of profitability on Marxian categories tend to be confined to the US, the still leading capitalist economy of the 21st century, or on individual capitalist states. In our upcoming book, World in Crisis, G Carchedi and I have brought together studies by young Marxist economists from around the globe to show the movement of rates of profit in many countries in the last 50-100 years. They provide in-depth empirical analyses and confirm the validity of Marx’s law of profitability.

But Marx had a world view of capitalism as one system and over the last 150 years that has proved to be correct as Capital has established itself as the dominant mode of production globally to the almost total exclusion of other earlier modes of production (slavery, absolutism, feudalism etc). So the concept of a world rate of profit becomes more credible – even though national barriers on trade, capital flows and labour remain in place, so distorting the tendency for the equalisation of profit rates across borders into one.

Back in 2012, I went ahead with the concept of a world rate of profit by simply weighting an average rate for the G7 and BRICs. I updated this work in 2015 (Revisiting a world rate of profit June 2015) by using other sources, in particular, the EU’s AMECO database, the ground-breaking work of Esteban Maito who looked at 14 major capitalist economies in working out a world rate; and also the Penn World Tables themselves.

By comparing all four sources, I found that “it is confirmed that the world rate of profit has been in secular decline in the post-war period” but “Marx’s law of the tendency of the rate of profit to fall does not imply that the rate of profit will fall in a straight line over time. Counteracting factors come into play that for a period of time can overcome the tendency.” My results show that this was the case between the mid-1970s or early up to the late 1990s or early 2000s (depending on the measure). The neoliberal period of recovery in profitability did take place, but it came to an end well before the Great Recession. World profitability was falling by the early to mid-2000s on most measures.

Most important, the results showed that “the changes in the rate of profit in the post-war period follow Marx’s law, namely that the secular decline was accompanied by a rise in the organic composition of capital that outstripped any rise in the rate of surplus value achieved by capitalists, at least in the G7 economies. Profitability rose in the neo-liberal period because the counteracting factor of a rising rate of exploitation dominated”.

Now a new paper has been published by Ivan Trofimov of the Kolej Yayasan Saad Business School, Malaysia in the PSL Quarterly Review of June 2017 called Profit rates in developed capitalist countries: a time series investigation.(Trofimov on profit rates). As Trofimov says, his paper “revisits the hypothesis of the secular decline in profit rates (the tendency of profit rates to decline in the long-run) that has been recurrent in classical economics and attempts to validate empirically whether profit rates in developed economies have declined in recent decades”.

Trofimov uses the Extended Penn World Tables as Zachariah and I have done and looks at 21 countries over the 40-year period from the early 1960s. As Zachariah and I also argued, Trofimov points out the value of this data series. “The use of a broader sample and of a sufficiently long series is advantageous; it allows examining secular tendencies in profit rates beyond cyclical fluctuations; it helps us trace structural and policy changes that took place over the recent decades in the developed economies”.

Yes, there is a problem with the Penn data. Given the nature of national accounts (no differentiation between productive and unproductive activities and the inclusion of government sector and residential capital), “such a methodological choice may be problematic, as far as a possible interpretation of empirical results from a Marxist political economy perspective”. But this is compensated for by the coherence and consistency of results. Trofimov also contributes extra value to his study by using “a battery of econometric tests” to support with some degree of significance the direction and movement of various national rates of profit.

What does Trofimov find? Well as he puts it, “visual observation suggests that over the study period (1964 to late 2000s) profit rates were likely to exhibit downward trends in Austria, Canada, Japan, Portugal, Spain, Switzerland and USA. Upward trends were likely in Luxembourg and Norway. In other economies either there was no distinct trend, or trend reversals and random walk behaviour were likely.”

And “visual inspection of this figure also suggests two distinct patterns for profit rates in most economies – decline until the mid or late 1970s, followed by partial or complete reversal.” In other words, Trofimov confirms what most studies of individual national accounts have found for the movement in the ‘Marxian’ rate of profit in the US and many other leading capitalist economies.

However, Trofimov points out that visual evidence (looking at a graph) can be misleading about whether a rise or fall in the rate of profit has taken place over time. And when he applies a range of statistical tests, he concluded that “there is no firm evidence supporting the hypothesis of secular decline in economy-wide profit rates in all developed economies. Instead, a diverse pattern of movements in the profit rates has been identified, including upward or downward deterministic trends, staggered declines, random walk, or stability and reversion to the mean.”

That sounds bad news for the generally accepted view that the profitability of capital in most major economies was lower in 2009 than in 1964. Yet Trofimov does say that “statistically significant positive trend coefficients were, however, only present for Greece (at 10% significance level), the Netherlands and Norway (at a 5% level). A negative trend was observed in 10 cases (Australia, Austria, Canada, Denmark, France, Japan, Portugal, Spain, Switzerland, and the USA). A statistically significant negative trend coefficient was present for Canada, Portugal, Switzerland and the USA (at a 5% significance level).”

Thus nearly all the major economies had lower profitability in 2009 compared to 1964 and the only ones that did not were smaller economies like Luxembourg or Norway or Greece. The tiny tax haven financial centre of Luxembourg is not hard to consider as an exception to Marx’s law and, as Trofimov says, for Greece and Norway, “In the first case this could be attributed to the rapid transformation of the economy in the 1960-1980s from a relatively low level; in the second case, the increase in economy-wide profit could have been boosted by the growth of the oil sector.”

Actually, I find the result for Greece puzzling. Works done by Greek Marxist economists do not find this overall rise in Greek profitability over the whole period and Trofimov’s own graph for Greece does not visually show that. In our upcoming World in Crisis book, Maniatis and Passas find the Greek rate of profit was lower in the early 21st century than in the 1960s, even though there was strong rise in the 1980s.

Of course, their measure uses different categories than Trofimov. And, as Trofimov explains, “There is no perfect correspondence between national accounts and Marxian variables (e.g. constant and variable capital, and surplus value).”

Nevertheless, in the case of the US, comparing the results from the Extended Penn tables and those from the US national accounts (work done by me previously), there seems to be a close correspondence. There is the well-established profitability crisis from the mid-1960s to the early 1980s; then a period of recovery in the neo-liberal period up to 1997 and then a new period of profitability decline culminating in the Great Recession.

While the US may be the most important capitalist economy, what was the trend across all the major economies? Is Trofimov correct to conclude that “overall, the behavior of profit rates has proven to be rather diverse, therefore it is unlikely that “universal profit rates’ laws” hold, or that only one hypothesis is correct.”?

Well, I went back to the Extended Penn Tables and redid my weighted average rate of profit for the G7 economies. Trofimov’s definition of the rate of profit from the tables is:

Y-Nw-D/K; where Y is the chain index of real GDP in 2005 purchasing power parity (PPP), K is the net fixed standardised capital stock in 2005 PPP, D is the estimated depreciation from K, w is the average real wage in 2005 PPP, and N is the number of employed workers.

After weighting the data by GDP, I came up with a rate of profit for the G7 from 1964-2009 as follows (my data and workings are available on request).

Now I took liberties with the data for Germany which were not available before 1984, given the division of Germany into west and east up to 1989. But my assumptions for the data for the period 1964-84 were realistic, in my view.

What my results show is that the G7 rate of profit fell secularly from 1964 to 2007 – as in all other studies; the fall mainly took place in the 1970s – as in the US; there was a recovery of modest proportions during the neo-liberal period from the early 1980s which peaked in the late 1990s – again as in the US. The subsequent recovery after the recession of 2001 gave way eventually to a steep fall in the Great Recession of 2008-9. These results confirm my original results of 2012 and 2015.

In order to get closer to a ‘world rate of profit’, the emerging economies must be added to the G7 result. I shall show that in a future post. And don’t forget the work of Esteban Maito (http://gesd.free.fr/maito14.pdf).

Clearly further research is necessary to get closer to a ‘Marxian’ rate of profit, as Trofimov points out, “These issues call for the need to construct “Marxian national accounts” prior to the analysis of profit rates in the Marxian formulation. First of all, given that a large part of economic activity in developed economies is unproductive according to the Marxist formulation, the overall level of profit rate is likely to be overestimated. Secondly, unproductive activities, typically embodied in the services, tended to rise over the past decades, meaning that estimated falls in profit rates might become more drastic, and certain estimated increases might become less substantial.”

Yes, the next task is to develop a world rate of profit measure based on productive capital – over to Hercules.

25 Responses to “Towards a world rate of profit – again”

There’s lots of issues with this, but the most fundamental one is that the Penn tables are not value measures. They are physical measures that are attributed a value (that is a made up number) by researchers in order that a comparison can be made between different economies. Indeed PPPs were originally developed so that the planned economies in general and the Soviet Union in particular could be measured “as if” it were a market economy. They are an attempt to overcome the difference in prices between different economies, to produce a standard measure for comparative purposes.
As capitalists only have to measure the rate of profit in prices, and never in PPPs, to estimate a rate of profit in PPPs is to produce a completely made up number.
A striking example of this is the attempt to estimate a rate of profit for China after 1978. This was the year in which the government began the introduction of market measures which eventually restored capitalism there. But this was a 20 year process, it did not happen in an instant. In 1978, notwithstanding the introduction of these measures, China was a planned economy, with just 2% of output valued at market prices. Yet bizarrely, it is claimed, profit rates in China fall from 1978, a year when there was no profit and so no profit rate!

You are right on the mark, Bill. PPP is a “physicalist” measure of what sorts of use-values a society produced over a given time, but investors don’t care about use-values in and of themselves. PPP is measuring production as if it were simply C->P->C’ (which is how it was under feudalism and how it would be under socialism).

It does an investor no good if his raw output doubles, *or even if the labor-value of his output doubles* but the price per unit falls by 75%. Capitalists do not invest raw output or abstract labor value. Nor can capitalists hoard abstract value, and thus use that as a logical baseline against which to judge the profitability of an investment.
Value can only be represented by a value-form, and investment must always make a profit in terms of that value-form, not just in physical terms *or even value terms*. For example, in our example above the investor will end up with a profit rate of -50%, when measured against the alternative that the investor had all along—simply hoarding the money (the value-form) and not throwing it into the M->C->P->C’->M’ process in the first place.

Of course, capitalists have a wide array of money-forms in which they may hoard their value. Therefore, for an investment (a process of M->C->P->C’->M’) to be truly “profitable,” it must make a profit *in terms of every money-form available to capitalists*. Showing profits in dollars is not enough because capitalists are not forced to hoard their value in terms of dollars. The profit rate must, instead, be calculated in terms of the most relatively-appreciating money-form over a long period of time. This is the logical baseline against which to compare investment because this is the best money-form in which to hoard value, and, to use the language of vulgar economists, this becomes the next-best “opportunity cost” that capitalists forego when they decide to start the process of M->C->P->C’->M’.

Empirically (and empirical evidence is all that our capitalists care about),*** among all available money-forms, gold has remained the one that shows the most relative appreciation over the long term.^^^ In other words, gold remains the best money-form in which to hoard value (if it is to be hoarded and not thrown into production). So, this is the opportunity cost that capitalists forego when they start the process of M->C->P->C’->M’. To truly show that an activity has been profitable and worth doing for our capitalists, it must make a profit as calculated in terms of gold.

Therefore, the best way to calculate a world rate of profit would be to simply convert all local currency prices of input costs and revenue into their universal golden prices.

***Note: Sam Williams at his Critique of Crisis Theory blog explains many theoretical reasons for why a commodity-money such as gold must maintain a central place in the world capitalist economy. But that’s just icing on the cake. Capitalists don’t need to agree with or understand the Critique of Crisis Theory blog to see with their own lyin’ eyes that they would have been better off hoarding gold during the Great Recession than making a 10%/year profit in terms of dollars. Capitalists don’t need theory to tell them to cease investment and hoard gold when production no longer yields profits in terms of gold.

^^^Note: If Bitcoin’s recent performance were anything but a speculative bubble, Bitcoin could unseat gold as this baseline money over the long-term, and thus capitalists would find the incentive to calculate their profits in terms of bitcoin in order to compare their potential profits to the opportunity cost of hoarding bitcoin. However, Bitcoin lacks a “natural price” or “price of production” and is thus not a commodity, properly-speaking. Therefore, there is ultimately nothing to anchor its price over the long-term, which makes its current price purely speculative and bound to fall to zero sooner or later. I can confidently predict, therefore, that it will not unseat gold as “baseline money” for calculating profits. It matters not what bitcoin’s use-value is. As we should all know, price, over the long-term, is not determined by something’s use-value, but by its price of production.

Wow, I expected some push-back on this post, but so far…nothing. So, either everyone already agrees with this “commodity-money” approach to the Law of Value (that would be news to me!)…or they don’t understand it enough to criticize it. Or maybe they all think that it is too foolish to warrant a response. Genuinely curious about which one of these it is.

I agree with Sam Williams, though not with only the strict use of gold though. There are other commodities that were always used as money, and Marx attest that. For example, silver, which allowed trade of Europe with the Far East. I would say that oil can be also considered money. As long as you can keep track of the relative prices of each other, you can peg money to all of them.

There is support for the use of money as commodity. Whenever precious metals ceased to be used as money, in the case of great imperialist powers, Gold, you had an explosion of debt that led to huge crisis, that is, around the 1st World War by the greatest power and after the Volker Shock (neo liberalism). Contrary to the mainstream thought, the gold standard in USA actually delayed the Great Depression, that started right after the 1st World War in Europe, for 1 decade.

The reason it is that capitalists borrow to buy new equipment from another capitalist, but there is not necessarily surplus from a previous cycle to expand business. If the capitalists keep buying, but cannot pay debt, we that there is a difference between the real surplus and one that is due borrowing. So, I think, this difference should be subtracted from the numerator.

Bitcoin does have a price of production, which is electricity use (those computers are power hugry) and the wearing of computer parts and their maintance. But, it is highly speculative, because precious metal in general do have applications in other commodities, so they cannot be integrated to a capitalist economy properly, given that they are susceptible to the turnover cycles of industry.

So, I think that too much credit, not pegged to commodity money, inflates the rate of profit in the because it inflates the surplus. The neoliberal period, where the rate of profit is a bubble, remains artificially high. It is infact much lower, I guess.

Trofimov is completely out of depth when he concludes “overall, the behavior of profit rates has proven to be rather diverse, therefore it is unlikely that “universal profit rates’ laws” hold, or that only one hypothesis is correct.”

USA’s GDP is roughly equal to the entire EU, and it showed a downward trend (as was the case of Japan). To state that, because a dozen tiny European nations (most of which, if not all, don’t even have a resemblance of a complete chain of capitalist production) showed erratic profit rates results over a 60-year period is to, at the bare minimum, to underestimate the intelligence of his readers. E. g. Norway has only 4 million people and a US$ 375.00bn GDP — to state it breaks the bank of the tendency of the profit rate to fall is disingenous to say the least. The fact he bothered to check Luxemburg (an even greater anomaly of the capitalist society) just adds to the insult.

Trofimov’s study is inconclusive (to the non-researcher reader; if you’re a researcher of the field, then of course it can be a useful source to a more conclusive study). To state anything else about it is to be economic with the truth.

(I am Daniel Rocha, I just cannot log in using google, this is just another surname of mine)

I just read it, thank you very much! But you deal with the denominator: “Following Dumenil and Levy (2005), I have adopted net worth as the denominator in the equation for the rate of profit.” Nevertheless, I was talking about the numerator.

Capitalists borrow to buy new equipment from another capitalist, but there is not necessarily surplus from a previous cycle to expand business. If the capitalists keep buying, but cannot pay debt, we that there is a difference between the real surplus and one that is due borrowing. So, I think, this difference should be subtracted from the numerator.

I would like to clarify one central point about the paper by Zachariah: it is an attempt to go beyond the orthodox formulation of the “law” and its “countertendencies”.

For instance, in the orthodox formulation intensified class struggle by capitalists can restore average profitability by increasing the fraction of surplus labour. By contrast, the paper proves that such changes cannot alter the trajectory of the average profit rate. Instead, distributional conflict can only affect average profitability by altering the fraction of reinvestments out of profits.

The paper proposes a theory of average profitability that is entirely determined by reinvestment, technical change and changes in the workforce. The predictive power of this theory is illustrated in Section 4.2.

It would be interesting to update this evaluation with the latest data.

Zachariah thesis was developed even before by G Carchedi. In some recent papers, he demonstrates that a rising rate of surplus value cannot overcome the the underlying tendency of a rising organic composition of capital over time – the basis of Zachariah’;s equilibrium rate of profit. see this by Carchedi http://gesd.free.fr/carchedi815.pdf and this in a joint paper with me http://gesd.free.fr/robcarch13.pdf

Carchedi is presenting further work on this at the upcoming Capital.150 symposium in London. Ill shortly be reviewing this and other papers from the symposium.

I think a global rate of profit is emerging first and foremost (or only?) where the market is global – e.g. by airplanes, cars, computers, certain chemicals, pilots etc. But also in raw materials, which are traded globally, oil, coal, metals etc.
I do not think that a global rate of profit is formed by the convergence of any national rates of profit. That does’nt make sense.

Dave solved it for Marx then. “Marx did not let go of the problems of the third volume either. He wanted to elaborate a valid mathematical justification for the relationship between the profit and surplus value. The manuscript “Wertwerthsrate und Profitrate mathematisch treatiert” of 1875 has not yet been published.” http://www.mxks.de/files/mew/Hecker.EntstehungsgeschDKapitals.t281203.html

“Yes, there is a problem with the Penn data … no differentiation between productive and unproductive activities and the inclusion of government sector and residential capital … But this is compensated for by the coherence and consistency of results.” Rogoff could not have said it better.

Bill Jeffries is quite right. PPPs cannot be used. At best a global rate of profit is the weighted average for the various economies in their own currency at mean exchange rates. But even here we would be misinformed. Unless all the paper trails are accounted for, or what is the same thing, export and import prices are adjusted for re-invoicing, an international rate of profit would be comprised.

Then we are not comparing like with like. Variable capital has been omitted. It has fallen dramatically since the 1950s as a share of total capital. Though Marx pointed out in volume 3 that the compensation of the top managers and officers of corporations were paid out of variable capital, it is clear that the trebling of their income relative to workers has played a role in modifying the underlying rate of profit. The distinction between productive and functionally unproductive workers plays no role in the determination of national rates of profit. What does, is the growing incorporation of “production for use” as this leads to duplication and imputations in the national accounts distorting both the size of wages and profits. That is why Total Private Industry which incorporates the bulk of these duplications has grown so much faster than Domestic Industry which contains less. Until and unless we include all these qualitative changes latter day figures are incommensurate with earlier figures. We are not comparing like with like.

Now a bit of kick back to citizencokane. The use of gold since it is no longer “priceless” to measure production, is problematic. (It is no longer the standard of price.) Have you taken into account the changing costs of producing gold. In 1999 measured by the AISC standard it was $360 per ounce and by 2016 nearly $1000. In sum three quarters of the rise in the price of gold over this period was consumed by the rise in the cost of gold. Hence unless the changed value of gold is factored in, the use of gold to measure anything is meaningless. Further there is the issue of the business or industrial (as Marx liked to call it) cycle with its alternating phases of deflation and inflation which alters the quantitative relation between commodities and gold itself. Altogether, what presents itself as a simple matter, a direct measurement, turns out to be altogether more complicated. I was asked to express an opinion on MELT which will be published shortly which will include a more detailed explanation and referencing.

I don’t think it is meaningless, but that token money is becoming meaningless due expansion of credit. Token money, be it in in electronic form or not, is a bubble, as you can see in the graphs I posted in response to citizencokane. Whenever token is not pegged to credit, it ends up in a huge bubble, the crisis of 1930’s is such case, the other one is 2008’s. In the latter case, though, it deleveraged slightly in 2015, but it kept on spending on 2016, unlike the huge delavarging with the Bretton Woods, which was a return to gold standard.

I think you have things the other way around, ucanbpolitical. It is not so much that the costs of gold have increased so much (in fact, in terms of labor-time I’m sure that the costs of gold have actually decreased somewhat over the past 50 years, albeit less than the decrease in the labor-time costs of most other commodities during the same, which has caused the *relative price* of gold to increase versus other commodities). Instead, you are seeing the symptom of the fact that the dollar has depreciated so much against gold.

You complain that gold’s (labor-)value fluctuates, which makes it undesirable to use as a yardstick, but that is only true if there were a yardstick available that fluctuated less than gold. There isn’t.

Gold is the best that we can do. It would be nice if we could measure the socially-necessary labor-time of commodities directly and price them in terms of that. That, by definition, would work as a stable labor-value yardstick. But we can’t observe the SNLT of commodities directly. We can observe concrete labor-time expended on the production of various commodities. But we can’t automatically observe whether that concrete labor-time counts as abstract socially-necessary labor time. 10 hours of concrete labor-time might only count as 2.5 hours of SNLT if half of the resulting commodity rots on store shelves and the other half can only, at that time, be sold at half of its price of production.

The commodity must still prove its socially-necessary nature by being sold for money (…at its price of production; if the market price happens to be higher than the price of production, then that concrete labor-time will actually count for more SNLT).

And the question then becomes, “which money?” No money will be a perfect yardstick of labor-time. But whichever money is the best money for hoarding over the long-term will count as the best yardstick to use because that money will serve as the best comparison between:

And just to re-iterate, MELT cannot be used as a yardstick because MELT is not money. Capitalists cannot be paid in MELT. Capitalists cannot hoard MELT. Capitalists can only be paid in dollars, yen, gold, etc.

I see MELT as an understandable over-reaction against the vulgar physicalism of the Physiocrats and the neo-Ricardians who want to measure profit and value in terms of corn and other physical use-values. So then Marxists go and create this yardstick (MELT) which doesn’t have an ounce of physical reality to it and which is wholly abstract. But the truth is a combination of the concrete and the abstract. Yes, profit must be measured in terms of (labor-)value, but (labor-)value (the abstract) can only appear in physical form (concretely) as exchange-value, which must always be measured in terms of the use-value of another commodity.

As for the cyclical nature of golden prices of commodities being problematic, I actually kind of agree. When the aggregate of the golden prices of commodities begins to outrun the production of gold, then that is a sign that the current golden prices of commodities are unsustainable and bound to adjust downwardly. It is a sign that not all of the golden prices of commodities will be able to be realized in exchange for gold (or its token representations). These golden prices may, for a time, be realized in exchange for credit—promises of gold—but the resort to credit is already a sign that there is not enough gold being produced to realize these golden prices in exchange for actual gold (otherwise sellers would prefer to obtain actual gold rather than mere promises for gold).

If “M” is gold, then for M’ to be larger than M in aggregate (after M –> C –> P –> C’ –> M’ has occurred), more “M” must actually exist for the average holding of “M” to have been increased in aggregate. (Of course, some capitalists will lose “M”, but others will gain “M”. For the average profit rate in terms of M to be positive, more M must actually exist).

Therefore, a better measure of the (sustainble) yearly average world rate of profit rate would simply be the rate of increase in the world gold stockpile.

So, for example, world gold production in 2016 was something like 3100 metric tons. The total world gold stockpile was something like 187200 metric tons. 3100 / 187200 = 0.017. So the sustainable world rate of profit in 2016 was 1.7%.

To the extent that existing golden prices reflected a higher world rate of profit, that is a sign that commodities were being sold for promises of gold or its token equivalents (credit) rather than for gold itself or its token equivalents. It is also a sign that those promises of gold or its token equivalents cannot be fulfilled indefinitely, in aggregate.